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Interpreting A CDs Yield Curve

By manybanking.com Staff
As of March 23, the average annual percentage yield (APY) on five-year certificates of deposit (CDs) rose 0.02% to 2.36%, according to the manybanking.com Rate Index. Meanwhile, the average APY on six-months CDs fell 0.02% to settle at 1.17%.

Category Product: 
CDs
Category Finance: 
Personal Finance
Symbols: 
BAC
WFC
Keywords: 
CD, Certificate of Deposit, APY, APR, Interest, Finance Charge, Deposit Account, Rates, Short-Term Rates, Yield
Introduction: 

By manybanking.com Staff
As of March 23, the average annual percentage yield (APY) on five-year certificates of deposit (CDs) rose 0.02% to 2.36%, according to the manybanking.com Rate Index. Meanwhile, the average APY on six-months CDs fell 0.02% to settle at 1.17%.

When short-term rates fall and long-term rates rise, some economists start talking about a steepening yield curve. The yield curve often refers to the change in interest rates between short- and long-term Treasuries. As you move from short-term Treasuries to long-term Treasuries, interest rates typically increase. A departure from this normal pattern can mean trouble for the economy. A recent analysis by the Federal Reserve reported that an inverted yield curve -- where yields on short-term Treasuries are higher than those on long-term Treasuries -- has preceded each of the last seven recessions, including the current one. (The yield curve was inverted in 2006.) Meanwhile, many economists say a steepening yield curve is a bullish sign.


So how should a steepening yield curve impact your CD-buying strategy? If you are like most investors, it shouldn’t impact your strategy at all. "In general, most consumers are just looking to park their money somewhere safe for a short period of time," says Cliff Michaels, a certified financial planner and president of New York-based Institutional Investment Advisors Corp.


Michaels recommends building a CD ladder if you want to invest in longer term CDs. "A CD ladder gets rid of a lot of the risks associated with longer term CDs," he says. "It allows you to take advantage of any rise in rates when it comes time to reinvest your maturing CD." To learn more about CD laddering, check out this article

And if you're just looking to buy a CD as safe place to stash your cash, make sure you shop around for the best rates. Head to manybanking.com and enter your ZIP code to receive rate offers from local institutions. For instance, residents of Arizona can get a $5,000 12-month CD from Bank of America (Stock quote: BAC) at an interest rate of 2.25%, a $10,000 12-month CD from Comerica (Stock quote: CMA) at 1.1%, or a $10,000 12-month CD from Wells Fargo (Stock quote: WFC) at 0.9%.


When buying CDs, it's a good move to buy them from an FDIC-insured institution -- this is especially important during these times of bank failures and financial scams. It's also wise to choose a CD based on how it fits into your financial strategy -- there no point in buying a long-term CD with a great interest rate if you need the money in the next few months.

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When short-term rates fall and long-term rates rise, some economists start talking about a steepening yield curve. The yield curve often refers to the change in interest rates between short- and long-term Treasuries. As you move from short-term Treasuries to long-term Treasuries, interest rates typically increase. A departure from this normal pattern can mean trouble for the economy. A recent analysis by the Federal Reserve reported that an inverted yield curve -- where yields on short-term Treasuries are higher than those on long-term Treasuries -- has preceded each of the last seven recessions, including the current one. (The yield curve was inverted in 2006.) Meanwhile, many economists say a steepening yield curve is a bullish sign.


So how should a steepening yield curve impact your CD-buying strategy? If you are like most investors, it shouldn’t impact your strategy at all. "In general, most consumers are just looking to park their money somewhere safe for a short period of time," says Cliff Michaels, a certified financial planner and president of New York-based Institutional Investment Advisors Corp.


Michaels recommends building a CD ladder if you want to invest in longer term CDs. "A CD ladder gets rid of a lot of the risks associated with longer term CDs," he says. "It allows you to take advantage of any rise in rates when it comes time to reinvest your maturing CD." To learn more about CD laddering, check out this article

And if you're just looking to buy a CD as safe place to stash your cash, make sure you shop around for the best rates. Head to manybanking.com and enter your ZIP code to receive rate offers from local institutions. For instance, residents of Arizona can get a $5,000 12-month CD from Bank of America (Stock quote: BAC) at an interest rate of 2.25%, a $10,000 12-month CD from Comerica (Stock quote: CMA) at 1.1%, or a $10,000 12-month CD from Wells Fargo (Stock quote: WFC) at 0.9%.


When buying CDs, it's a good move to buy them from an FDIC-insured institution -- this is especially important during these times of bank failures and financial scams. It's also wise to choose a CD based on how it fits into your financial strategy -- there no point in buying a long-term CD with a great interest rate if you need the money in the next few months.

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